It is mid-2005. Your task is to study the financing structure of Pfizer, the New York-based pharamceuticals company.

In recent months the company's stock price has been depressed, and management is concerned about re-examining the financial structure. Management is also concerned with the financing of forthcoming acquisitions, as Pfizer encounters opportunities for strategic mergers from time to time. Should Pfizer continue to take advantage of its strong cash flow, or should it begin to use debt financing? If it does raise additional debt, the proceeds will be used for a stock buyback.

Pfizer's current position:
Current share price:  USD 26
Shares outstanding:   7360   million
Beta of the stock based on the US S&P 500 index: 0.4
Debt outstanding:   $12 billion
Cash: $14.5 billion
Debt rating:  AAA
Market rate on bonds with rating   AAA 5.65%
Government 10-year bond rate:   4.00%
S&P long-run expected return  5.50% over governments
Company's marginal tax rate:   30%
2005 estimated pretax operating profit:  $15 billion
2005 est. book value of equity:  $70 billion
Based on the company's business, its interest coverage and other factors, the following table shows what an increase in long term debt would do to the company's ratings and its cost of borrowing as well as several key ratios:

1. Should Pfizer take on additional debt? If so, how much?
2. What is the weighted average cost of capital before and after the additional debt?
3. How much does Pfizer's value change as a result of the lower cost of capital? What will be the estimated price per share after the company takes on new debt?

Notes:
1. To answer these questions, you may want to use updated data about the company, its share price, etc.
2. To assess the impact on Pfizer's value, you may assume that the additional value comes from the savings from a lower cost of capital each year, and that the savings will continue indefinitely.

Exhibit 1: Summary Pfizer Financials